Early-Stage Entrepreneurial Financing: A Signaling Perspective
40 Pages Posted: 15 Mar 2012 Last revised: 8 Feb 2016
Date Written: August 1, 2015
We analyze an entrepreneur's choice between angel and venture capital (VC) financing in a competitive investment market, where the entrepreneur seeks to maintain his ownership share as well as equity value. The key to our analysis is the idea that a negative signal is inferred by the market if an inside investor chooses not to follow on a subsequent investment. We first show that when ventures are ex-ante identical, entrepreneurs retain higher ownership shares by financing with angel investors who commit to not participate in a future round. When entrepreneurs are ex-ante heterogeneous, there is a separating equilibrium where entrepreneurs with higher (lower) likelihoods of success choose VC financing (angel financing) in the first round.
Keywords: Entrepreneurial financing; insider signaling; venture capital; angel investing
JEL Classification: G14; G24; D82
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